Forfeiture of warrant premium

A share warrant gives its holder the right, not the obligation, to buy shares at a fixed strike price later. Exercising that right takes a deliberate step, and if the holder misses the window, the money already paid in is gone.

The workbook is blunt about what that lost money means for tax purposes: nothing. It is not treated as a capital loss, and it cannot be set off against any gain.

Under SEBI (ICDR) Regulations, 2018, a warrant holder must pay at least 25% of the strike price upfront, with a warrant tenure capped at 18 months from allotment in an IPO, rights issue or FPO.

If the holder does not exercise the option to take equity shares within 3 months of paying the full consideration, the issuer forfeits whatever consideration was paid in respect of those warrants.

The workbook's rule on that forfeited amount: it gets no tax treatment and is ignored entirely when computing taxable income. It is not a capital loss available for set-off, and it is not added back anywhere else. It simply disappears from the tax computation, the same way it disappeared from the holder's pocket.

Illustrative figures. Mr Rao is allotted 10,000 share warrants at a strike price of Rs 150 each. He pays the required 25% upfront: Rs 1,50,000 x 25% x 10,000/10,000 works out to Rs 3,75,000 paid in.

Suppose he later pays the remaining consideration in full, taking his total payment to Rs 15,00,000, but then fails to exercise the option to convert the warrants into shares within 3 months of that full payment. The issuer forfeits the entire Rs 15,00,000.

Mr Rao cannot claim this Rs 15,00,000 as a capital loss against any other gain he has that year — the workbook's rule gives it no tax treatment at all, so it is simply a real economic loss with no offsetting tax benefit whatsoever.

Chapter 11 (Taxation of Equity Products), section 11.5, "Tax Treatment of Share Warrants," states the 3-month exercise window and the forfeiture rule immediately after covering the tax treatment of converting or transferring warrants. Expect a question distinguishing forfeiture from conversion and transfer, the two other outcomes the same section covers, each of which does attract capital gains tax.

• Forfeiture gets no tax treatment at all — it is not a capital loss. Conversion and transfer of the same warrant, by contrast, are both treated as capital gains events.
• The 3-month clock runs from full payment of consideration, not from the date of allotment.
• The 25% upfront payment requirement is a SEBI ICDR rule, separate from the Income Tax Act's treatment of what happens if the warrant later lapses.